Thursday, June 24, 2010

Financials Breaking Down

The default rush to Treasuries despite more than abundant supply is a bad sign. The well-regarded but fundamentally pricy regional financial services/bank company with the symbol UMBF has hit a 12-month low today. Northern Trust has broken down. GS and JPM have been in classic bear configurations for some time. BAC is close to a technical breakdown, as well.

As the financials broke down well before the stock market topped in 2007, it is feared that the breakdown of these companies' stocks may presage a general "correction". Given national and global economic situations objectively, without judging the future, it is hard to see that the stock market should not trade at fair value, which observers I find credible peg at anywhere from 20-25% below current prices.

Investors must learn the investing lesson of Japan. This is that persistent ultra-low government borrowing rates that are associated with a sluggish economy eventually lead to stock prices reflecting said sluggishness rather than the growth expectations that are priced in. Thus, investors should ignore the current relative attractiveness of 2-3% dividend yielders except to the extent that said dividends derive from globally attractive markets, such as India and Brazil.

EBR feels that given the chimeric Japanecian (Grecianese) risk our government's finances bear (also called fat tailed possibilities), caution is appropriate. AAPPL and gold, as stated here recently, are both flat to up as of this post while stock averages are down. This reflects relative and absolute performance over various longer time periods, and while no bells are rung during trend changes, I see no valuation or other reasons for said trends to change.

Cash may be "trash", but sometimes it's less trashy than other assets.

Copyright (C) Long Lake LLC 2010

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